Advertisement

Entering a Foreign Market: Exports, FDI or Strategic Alliance?

  • Karl MoraschEmail author
Chapter
Part of the Contributions to Management Science book series (MANAGEMENT SC.)

Abstract

The decision over exports vs. foreign direct investment (FDI) is usually discussed in an extension of the so-called Melitz model where firms with heterogeneous costs compete in a monopolistically competitive industry. The present paper starts from a situation where a potential foreign entrant would be just indifferent between exports and FDI in such a setting. However, by assuming oligopolistic interaction, strategic considerations are also taken into account. It is shown how the strategic impact of lower marginal cost makes FDI more attractive in a Cournot setting while exports are preferable under price competition in a market with differentiated goods. Beyond that it is also explored how a strategic alliance with a local incumbent could be a superior alternative for market entry.

Keywords

Alliances Entry strategies FDI Oligopoly Trade 

References

  1. Barac M, Moner-Colonques R (2016) Internationalization strategies in oligopoly with heterogeneous firms. Bull Econ Res 68(1):66–77CrossRefGoogle Scholar
  2. Bekkers E, Francois R (2013) Trade and industrial structure with large firms and heterogeneity. Eur Econ Rev 60:69–90CrossRefGoogle Scholar
  3. Bernard AB, Jensen JB, Redding SJ, Schott PK (2018) Global firms. J Econ Lit 56(2):565–619CrossRefGoogle Scholar
  4. Collie DR (2016) Gains from variety? Product differentiation and the possibility of losses from trade under Cournot oligopoly with free entry. Econ Lett 146:55–58CrossRefGoogle Scholar
  5. Deneckere R, Davidson D (1985) Incentives to form coalitions with Bertrand competition. RAND J Econ 16:473–486CrossRefGoogle Scholar
  6. Dixit A, Stiglitz J (1977) Monopolistic competition and optimum product diversity. Am Econ Rev 67:287–308Google Scholar
  7. Helpman E (2006) Trade, FDI, and the organization of firms. J Econ Lit 44(3):589–630CrossRefGoogle Scholar
  8. Helpman E, Melitz MJ, Yeaple SR (2004) Exports versus FDI with heterogeneous firms. Am Econ Rev 94:300–316CrossRefGoogle Scholar
  9. Katz ML (1991) Game-playing agents: unobservable contracts as precommitments. RAND J Econ 22:307–328CrossRefGoogle Scholar
  10. Kreps DM, Scheinkman JA (1983) Quantity precommitment and Bertrand competition yield Cournot outcomes. Bell J Econ 14(2): 326–337CrossRefGoogle Scholar
  11. Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71:1695–1725CrossRefGoogle Scholar
  12. Melitz MJ, Ottaviano GIP (2008) Market size, trade, and productivity. Rev Econ Stud 75:295–316CrossRefGoogle Scholar
  13. Morasch K (2000) Strategic alliances as Stackelberg cartels — concept and equilibrium alliance structure. Int J Ind Organ 18:257–282CrossRefGoogle Scholar
  14. Salant SW, Switzer S, Reynolds RJ (1983) Losses from horizontal merger: the effects of an exogenous change in industry structure on Cournot–Nash equilibrium. Q J Econ 48:185–199CrossRefGoogle Scholar
  15. Spence M (1976) Product selection, fixed costs and monopolistic competition. Rev Econ Stud 43:217–235CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.Bundeswehr University MunichNeubibergGermany

Personalised recommendations